Auto insurance pricing “scheme” warning issued by Consumer Federation

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A leading consumer advocate is cautioning Americans regarding the importance of shopping around.

Many American drivers have held a policy with the same auto insurance company for many years and while they know that they would likely be able to save a little bit on premiums by shopping around, they often remain loyal to the same company for one reason or another.

The Consumer Federation of America has warned that there is a high price that can come with loyalty.

According to the alert that was recently issued by the consumer advocacy group, a growing number of auto insurance companies are using a new kind of pricing “scheme” that, in essence, penalizes their most loyal customers by hiking premiums based on statistical models that indicate the highest amount that a policyholder will be willing to tolerate before being driven to start to look into buying coverage somewhere else.

This is not a universal practice among auto insurance companies but it is not uncommon, said the warning.

auto insurance car policyThe alert referred to the practice as “price optimization,” and it has to do with increasing premiums based on the likelihood that a policyholder will become fed up with the prices and look to other insurance companies for a better deal, said the association of nonprofit consumer groups, based in Washington D.C.

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Bob Hunter, the director of insurance for the federation, and the former Texas insurance commissioner, said that this technique is not exclusive to vehicle coverage. There are other types of insurance policies that are also priced using this type of technique, he said. However, he also pointed out that this is most common among auto insurers.

Hunter explained that about half of the biggest car insurance companies in the country use this practice to set their prices. He stated that “Your insurer may be increasing your premium by far more than your loyalty discount, precisely because you have been so loyal.”

The federation stated that this practice is actually in violation of laws in states that prohibit insurers from unfairly discriminating against consumers that share similar risk profiles as others whose premiums are lower. However at the same time, action is not necessarily being taken. For example, in Pennsylvania, executive Randy Rohrbaugh, from the Insurance Department, said that while the practice was being closely monitored, they had not identified a problem with its use, as of yet.

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